Why Brisbane gas prices are low: Wood Mackenzie explains

A report prepared for the Owen Inquiry by Wood Mackenzie Wood explained why gas prices in NSW and South Australia were higher than the gas prices in Melbourne and Brisbane. Mackenzie’s gas price outlook was based on an assumption that rational economic investment decisions would be made based on cost and price.

Assumed carbon price: It assumed that a Carbon Trading scheme will be implemented in Eastern Australia by 2010.

Market distortions listed:

• Government ownership of the retail sector in NSW; • Participation of Government owned generators in new-build capacity in NSW;

• Government mandated technology for new-build generation in NSW.

Gas transport the key cost:“The increase in competing sources of gas supply, together with the interconnection of the states through gas transmission, had lead to the convergence of regional gas pricing in recent years. Gas-on-gas supply competition now occurs on an interstate basis. Gas market prices in Eastern Australia reflect the differences in transportation distances from the competing supply hubs to the city-gate markets. As a result, gas prices in NSW and South Australia are higher than the gas prices in Melbourne and Brisbane”.

But NSW gas price to fall: The delivered gas price to NSW was based on both the commodity price and transportation cost. For the forecast period, Wood Mackenzie analysed price components. In transportation cost, the following assumptions were used;

• pipeline expansions and new build tariffs estimated based on current cost estimates and industry accepted economic returns;

• sequencing of pipeline expansions and builds based on Wood Mackenzie analysis (recognising that valid alternatives are possible);

• gas load for new gas-fired generation will provide the incremental demand to support development of the required new pipeline infrastructure.

Tariff fuzz: “It is important to recognise that other factors will determine the price at which gas transportation agreements will be written and therefore a negotiated tariff could be less than our return based calculated tariff”

Price of gas at the key supply hubs: The commodity price of gas at the key supply hubs was based on an average price for the producing projects around that hub. It assumed that contracted supply would have;

Additional costs to the commodity price would be incurred in order to manage a gas-fired generator with 50 per cent load factor. These costs would include such services as storage and/or pipeline park-and-loan. These were not included.